RBI repo rate at 5.50%: Another 50 bps hike likely by March 2027 — which debt mutual funds suit 3–18 month horizons?

The Reserve Bank of India’s 25-basis-point (bps) repo rate hike has raised questions among debt fund investors about how further rate moves could affect bond yields and fund returns.

On October 7, the RBI’s Monetary Policy Committee (MPC) raised the policy repo rate by 25 bps to 5.50% from 5.25%. A higher repo rate typically pushes bond yields up and existing bond prices down, which can affect debt fund NAVs and returns.

As per the Kotak Mutual Fund October 2026 report, it now expects another 50 bps of rate hikes by March 2027, taking the repo rate to 6%, citing the RBI’s shift from neutral to a calibrated tightening stance and its higher FY27 CPI inflation projection of 5.2% from 5%.

Here’s what debt-fund investors should consider across 3-, 12- and 18-month investment horizons now.

How have bond markets reacted to the RBI rate hike?

According to a Kotak MF report, the 10-year G-Sec yield initially hardened by 5–6 bps to around 7.25% before easing back to about 7.20%. Meanwhile, the 30-year G-Sec yield softened to around 7.69% on October 7.

Market pricing currently appears more aggressive than the likely policy path implied by the RBI, leaving room for expectations to moderate over time. The fund house expects the yield curve to flatten further during the remainder of the tightening cycle, with shorter and intermediate maturities likely to adjust more than the long end.

Long-duration G-Secs remain attractive for medium- to long-term investors at yields near 7.70%. However, yields could test 7.90–8% in the coming months, making staggered allocation more suitable for investors with longer horizons.

Which debt funds suit an investment horizon of at least 3 months?

For investors with a minimum three-month horizon, ultra-short-duration, money-market and low-duration funds can be considered, according to Kotak MF.

Abhishek Bisen, Head–Fixed Income, Kotak Mahindra AMC, said the shorter-end yield curve remains relatively steep, allowing investors to earn attractive yields even over a brief holding period. These categories also have limited interest-rate sensitivity, which can help contain mark-to-market volatility and provide greater capital stability.

Which debt funds suit a 12-month investment horizon?